Requirements Calculate each division's ROI. Round all of your answers to four decimal places 2. Calculate each division's profit margin ratio. Interpret your results. 3. Calculate each division's asset turnover ratio. Interpret your results. 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. 5. Calculate each division's RI. Interpret your results, and offer a recommendation for any division with negative RI. 6. Describe some of the factors that management considers when setting its minimum target rate of return. Print Done 1 Data Table Paint Stores Net Sales Operating Average Total Revenue Income Assets $ 3,970,000 $ 478,000 $ 1,400,000 1.310.000 184.000 1.610,000 Consumer Print Done Bern Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer. (Click the icon to view the information.) Management has specified a 20% target rate of return. Read the requirements. Requirement 1. Calculate each division's ROI. Round all of your answers to four decimal places. Begin by selecting the formula to calculate return on investment (ROI), and then enter the amounts to calculate each division's ROI. (Round your calculations to four decimal places and enter your answer as a percent rounded to two decimal places, X.XX%) Paint Stores Consumer Operating income 478000 184000 - Average total assets 1 400000 1 610000 = = = ROI 34.14 % 11.43 % Requirement 2. Calculate each division's profit margin ratio. Interpret your results. Begin by selecting the formula to calculate profit margin ratio, and then enter the amounts to calculate each division's profit margin ratio. (Enter each profit margin ratio as a percent rounded to two decimal places, X.XX%.) Operating income + Net sales revenue = Profit margin ratio Paint Stores 478000 3 970000 = 12.04 % Consumer 184000 1310000 = 14.05 % The division is more profitable on each dollar of sales. Requirement 3. Calculate each division's asset turnover ratio. Interpret your results. Begin by selecting the formula to calculate asset turnover ratio, and then enter the amounts to calculate each division's asset turnover ratio. (Round your answers to four decimal places, X.XXXX.) Net sales revenue + Average total assets = Asset turnover ratio Paint Stores 3970000 1400000 = 2.8357 Consumer 1310000 1610000 = 0.8137 The Paint Stores division is more efficient in generating sales with its average total assets. Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. First, select the expanded ROI formula Profit margin ratio * Asset turnover ratio = ROI Now calculate ROI for each division using the expanded ROI formula. (Enter your answers as a percent rounded to two decimal places, X.XX%.) Using the expanded formula, the ROI for the Paint Stores division is 34.14 % Using the expanded formula, the ROI for the Consumer division is 11.43 %. The Consumer division's profitability on each dollar of net sales revenue is division's profitability. However, the Paint Stores division's efficiency is significantly division's efficiency. These results cause the Paint Stores division's ROI to be division's ROI. than the Paint Stores than the Consumer the Consumer Requirement 5. Calculate each division's RI. Interpret your results, and offer a recommendation for any division with negative RI. First, select the formula to calculate residual income (RI). | Operating income - ( Average total assets * Target rate of return y) = RI Now calculate each division's RI. (Use a minus sign or parentheses to enter negative residual income.) The Rl for the Paint Stores division is The Rl for the Consumer division is V meeting management's target rate of return. A division with a negative RI should consider Requirement 6. Describe some of the factors that management considers when setting its minimum target rate of return Management different minimum target rates for different divisions. For example, management require a higher target rate of return from a division operating in a riskier business environment. Management will need to decide for the calculations and whether it should be net of
